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Aol purchasepro fool investors { September 24 2003 } Original Source Link: (May no longer be active)
http://www.washingtonpost.com/wp-dyn/articles/A54900-2003Sep23.htmlhttp://www.washingtonpost.com/wp-dyn/articles/A54900-2003Sep23.html
Two Admit to Plot To Pad Revenue In Deals With AOL
PurchasePro Executives to Aid Probe
By David A. Vise
Washington Post Staff Writer
Wednesday, September 24, 2003; Page E01
Two executives of a defunct Las Vegas software company pleaded guilty yesterday in a scheme to inflate revenue through a series of deals with America Online and agreed to cooperate in a related probe of the Internet giant, according to government officials and court documents.
The Justice Department and the Securities and Exchange Commission filed criminal and civil charges against the two men, who court papers said conspired with AOL employees to boost revenue in an effort to fool investors into thinking their company, PurchasePro.com Inc., was a growing, thriving enterprise.
Jeffrey R. Anderson, PurchasePro's former senior vice president of sales and strategic development, pleaded guilty to conspiracy to commit wire fraud for helping to overstate revenue and then directing a subordinate to create a falsified spreadsheet to cover up the wrongdoing, according to court documents.
Scott H. Miller, the company's former controller and senior vice president of finance, pleaded guilty to impeding and obstructing a federal criminal probe by destroying documents sought by authorities.
Both men have agreed to provide federal investigators with fresh leads in building a case against AOL and former AOL employees, sources familiar with the probe said. PurchasePro specialized in software that allowed companies to do business with one another over the Internet. It was one of several companies that took part in a series of unconventional deals with America Online that helped the Internet company boost its revenue totals before and after its merger with Time Warner in January 2001.
In an interview, Paul McNulty, U.S. attorney for the Eastern District of Virginia, said prosecutors are continuing to follow the Internet money trail.
"This is among the most significant investigations we have been involved with," McNulty said. "Investors were defrauded by this conspiracy. . . . Today's plea, however, represents only the beginning of our effort to investigate and prosecute corporate fraud and to bring to justice those who purposefully deceive the financial markets and the investing public."
Eric Keller, a former AOL vice president of business development, is the subject of a continuing criminal probe into wrongdoing related to advertising deals between AOL and PurchasePro, sources familiar with the matter said. His attorney declined to comment. Sources said authorities are also investigating the actions of the head of AOL's business development unit, David Colburn. His attorney also declined comment.
America Online's corporate parent, AOL Time Warner Inc., said it is assisting both the Justice Department and SEC probes. The company has restated more than $190 million in revenue and profits it acknowledges was overstated, and turned over more than 1 million pages of documents to federal investigators.
"We continue to seek to cooperate with the government on their investigations," said AOL Time Warner spokeswoman Tricia Primrose.
AOL officials hope the company's extensive cooperation with federal investigators will help it avoid criminal charges. Meanwhile, the ongoing civil and criminal probes remain a cloud over the media behemoth that is preventing it from moving forward with certain business strategies, including plans to spin off its Time Warner cable unit to investors.
The SEC probe into AOL is likely to be completed sometime next year, sources familiar with the investigation said. But they said the criminal investigation into individuals who worked for AOL appears to be proceeding somewhat faster.
America Online's dealings with PurchasePro were the subject of a July 2002 examination of AOL's accounting practices by The Washington Post. The stories prompted scrutiny of AOL's finances and raised questions about whether company officials deliberately inflated revenue to prop up AOL's stock price to facilitate its $112 billion merger with Time Warner.
Many of the transactions involved the unconventional booking of a vast array of complex deals, including legal settlements and business referrals, as advertising revenue. Ad revenue was considered a key barometer of AOL's financial health and growth that directly affected its stock price.
McNulty said corporate fraud matters receive his office's highest priority, second only to terrorism cases. He is also working with federal prosecutors in California, who have won a series of guilty pleas from executives with HomeStore Inc., another firm that allegedly engaged in improper transactions with AOL.
According to legal papers filed yesterday, Anderson, 36, admitted that he and an AOL employee knowingly participated in an illicit scheme to falsely inflate PurchasePro's sales through a complex exchange of transactions that involved a web of other companies.
At the heart of the scheme was a secret relationship between AOL and PurchasePro, in which AOL was "pressuring or strong-arming" its partners and suppliers to buy software licenses from PurchasePro, according to court papers. In exchange, the filings said, PurchasePro gave AOL a $30 million financial stake in its company, which AOL recorded as advertising revenue.
In addition, the value of 10 or more software licenses was inflated by moving money back and forth through various transactions among PurchasePro, AOL, a motorcycle company, an Internet clothing firm, a payment systems company, an insurance firm and others. The companies would not have paid the inflated prices for the software licenses without the swapping of revenue, court papers said.
The revenue swapping also involved a promise from AOL to help PurchasePro meet future revenue targets, the court filings said. Anderson faces a prison term of up to five years and a fine of up to $250,000.
The 44-year-old Miller, who faces a maximum prison term of 20 years and a fine of up to $250,000, pleaded guilty to obstruction of justice charges for destroying documents, lying to the SEC under oath and attempting to delete documents from his laptop after receiving a subpoena requesting documents from the SEC related to PurchasePro's dealings with AOL earlier this year, according to court papers.
Miller served as controller and senior vice president of PurchasePro and was the senior officer overseeing the firm's finances.
Staff writer Jerry Markon contributed to this report.
© 2003 The Washington Post Company
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